Mountains may shelter the Coachella Valley from undesirable weather patterns that affect those beyond the desert, but they could not protect us from the economy. Despite its resort lifestyle, the desert has felt the pain of the past 18 months.
However, vast resources also put the valley on the cutting edge of what economists think will be the way out of the recession.
CONVENTION, TOURISM BUSINESS SLIPS
Since late 2007, Coachella Valley housing prices fell as far as they’d risen (more than 35 percent). With an impossibly high inventory, publicly traded development companies abandoned housing projects as early as autumn, when sales slowed and projections looked worse. Much-touted mixed-use projects were put on hold or abandoned. Tourism faltered, and convention business dried up.
Even companies with money to convene didn’t want to be seen as extravagant. Retail sales shriveled, and national chains such as Circuit City, Gottschalks, Linens ’n’ Things, Starbucks, Macy’s, and Sears closed stores. Even more local merchants folded as the recession deepened in September 2008.
“I’ve never seen anything like this,” says Judy Vossler, senior vice president of Landmark Golf, manager of the Frank Sinatra Celebrity Invitational, Betty Ford Pro-Am, and Giddings Cup. “All three tournaments are each down more than 20 percent. That’s for pay-to-play, as well as tournament enrollment and entry fees. Companies just are not offering golf club memberships or green fees as incentives to employees these days. Even the silent and live auctions were off.”
The Sinatra invitational was one of the first to feel the pinch. Its main sponsor, Countrywide, collapsed in the subprime mortgage meltdown and was absorbed by Bank of America, leaving the tournament sponsorless. Starkey Hearing Foundation stepped in, but at a lower level of backing. What happens next year remains anyone’s guess.
Kraft Nabisco maintained sponsorship of its eponymous LPGA event, but didn’t send its usual retinue of executives and guests to the event that was, after all, developed to recognize Kraft Nabisco clients and corporate achievers. That meant empty rooms for hotels throughout the valley.
Similar cancellations and a severe downturn in convention center bookings troubled the valley’s tourism leaders starting last year.
“Oh, gosh, it was awful!” says Jeff Beckelman, president/CEO of the Palm Springs Desert Resorts Convention and Visitors Authority. “In my [40-plus year] career in CVB work and the private sector, I’ve never seen it like this. We started seeing the downturn in the late spring/early summer of 2008.”
A CVA poll of 10 local hotels shows how tough the convention business — or rather the lack of it — has been. Between the fourth quarter of 2008 and first quarter of 2009, cancellations and nonproducing leads tallied losses of 50,393 room nights, 34,974 delegates (and their discretionary spending), and 121 convention and meeting groups.
From January through June of this year, Beckelman says, hotel occupancy was down 12.7 percent, the average daily rate down 10.6 percent, and revenue per available room (the prime indicator of just how well a hotel is doing) down 22 percent from the previous year. And 2008 was already in decline: That year, the same indicators were down 6.8 percent, 1 percent, and 7.7 percent, respectively.
EVENTS SUCCEED DESPITE THE ECONOMY
People still want to have fun, but they did so conservatively last season. Local theater proved the adage “the show must go on.” The Fabulous Palm Springs Follies set no attendance records, but, according to its own tracking, is reaching a broader demographic. McCallum Theatre ticket sales were off about 4 percent from last year, but the theater was ranked No. 1 in California and No. 15 in the world for percentage of seats sold in the first quarter of 2009.
Blockbuster events drew the crowds and cash that saved the day. Events produced here by others provide work, national exposure, and income from attendees who need hotel rooms, meals, and other entertainment. The BNP Paribas Open (formerly Pacific Life Open) at Indian Wells Tennis Garden and Coachella Music and Arts and Stagecoach festivals in Indio set attendance records this spring.
Gay and lesbian events “really held their own versus last year,” says Michael Green, a Palm Springs Hospitality Association board member. “There has been a lower average daily rate, and group business has been down; but the boutique, midrange, and budget properties experienced a real bump up in business — especially weekend business,” he says. White Party attendance was up 20 percent from last year, while Dinah Shore Weekend was up a record 50 percent, according to Palm Springs Convention Center figures.
Modernism Week in Palm Springs saw a 24.9 percent increase in attendance and an economic impact of $2.25 million. “Thousands of visitors were in town for the event,” says Mary Jo Ginther, director of the Palm Springs Bureau of Tourism, “buying furniture and taking architectural tours … and spending money in hotels and restaurants. It’s a truly unique Palm Springs experience.” The Palm Springs Modern Committee is cementing its position as a tourism draw by investing $10,000 into an upgraded information kiosk at the Palm Springs Visitors Center to provide maps and modern architecture resource information.
Modernism Week also affects local real estate. Aficionados move to the region because they love the midcentury aesthetic and want to live in an architecturally significant house.
Over the summer, the convention and visitors authority boosted efforts to bring corporate planners to the desert, while staging road shows for potential business from San Diego to Vancouver. Palm Springs ran a “Bring the Kids … or Come Play Like One” campaign through Sept. 1 to attract business in the drive markets. The Desert Gay Tourism Guild continued its successful “Summer Splash” promotion initiated last year.
Judging from July 4 weekend numbers, those efforts were successful. “The pool and casino were packed,” says Julius Kazen, general manager of Spa Resort Casino. “Most of the crowd was from the Southern California drive markets, which the [Palm Springs] Bureau of Tourism had targeted.”
The concerted tourism push, combined with individual restaurant and hotel promotional offers (such as two-for-one and budget fixed-price dinners), prevented a sharp fall-off after July 4.
HOUSING MARKET SEARCHES FOR A TURNAROUND
Coachella Valley foreclosures top all other areas of California. Ending that trend is crucial to a turnaround. “We are at all-time lows in housing starts and sales prices,” says Fred Bell, executive director of the Building Industry Association’s Desert Chapter. “As with other business cycles, we have seen similar patterns capped by a fever pitch of activity as the business cycle tops out. No question this is what happened to the housing market beginning in the second quarter of 2005.”
Valley cities have tried to rally as their citizens lose their houses. Indio allocated $2.8 million to deal with foreclosures, according to City Manager Glenn Southard, despite the city’s declining budget revenues due to the precipitous drop in developer fees. The city has opened a Housing Resource Center to help keep people in their homes. By mid-summer, the center had received more than 450 phone calls, conducted more than 140 formal counseling sessions, and kept 139 families in their homes. “We buy, renovate, and then resell foreclosures to low- and mid-income people,” Southard says.
New housing projects in Indio include Alegria at Spanish Walk and Whittier Ranch. “Our residential building permits are actually higher than expected,” Southard says. “Pulte [Homes] is moving ahead with its expansion at Sun City [Shadow Hills] to build another 1,000 homes.” The city issued only 206 permits for all of 2008; halfway through 2009, it had already issued 261.
Even luxury communities felt the recession. Bighorn Golf Club membership increased by only 10 members in the past season (measured to May); a normal increase for the past few years was 20 to 40 new members. La Quinta Country Club introduced a “get acquainted” program, offering potential members the opportunity to try the facilities for a year, paying dues but no initiation fee.
Economists believe a recovery in the housing market is key to the recovery of the overall economy.
“As we recover, many families that were locked out of the housing market will be able to afford a home,” Bell says. “This in turn will create move-up buyers [those who sell houses to these new buyers and then buy bigger houses themselves], which in turn will stabilize pricing and help existing homeowners recover some of the equity they’ve lost over the past three years.”
According to midsummer figures from the California Desert Association of Realtors, prices have begun to stabilize. Home sales rose to 2,898 in the April-June period, up from 2,010 in the January-March period, with the average seller getting 85 percent of the original asking price. Average prices stabilized at $250,000 in the second quarter, compared to $275,000 in the first quarter. “The real estate market is richly rewarding and harshly cruel all at the same time,” says California Desert Realtors Executive Director Greg Berkemer. “If you’re trying to sell, you’re in bad shape. But if you’re a first-time buyer, you’re in great shape. Prices are at their lowest in 12 years, you get federal tax credits, housing credits …”
Desert Hot Springs and the Salton Sea — areas high on the foreclosure list — saw the biggest sales increases. “Prices have dropped so much, people are saying ‘Why not?’” says Canyon National Bank President and CEO Steve Hoffmann. “We are seeing a real pickup in sales of bank-owned real-estate,” he adds, “and a lot of it is new construction where the builder failed. Once inventory has gone down a bit more, I expect we will see finished lots starting to sell.”
GROWERS WEIGH THE BAD AND THE GOOD
Agriculture, the valley’s oldest business and a major source of revenue, has had to deal with Mother Nature as well as the economy. “Good planning by the Coachella Valley Water District has given us an excellent supply of water,” says John Powell, president and CEO of Peter Rabbit Farms in Coachella, one of the region’s largest growers. “Exceptionally high fuel and fertilizer costs in the fall, when we were planting and growing most of our crops, did generate a large spike in our average cost to grow an acre of crops. But demand has been strong across major commodities as people look to feed their families at low cost, while the labor force has been supplemented by employees we lost to construction over the past several years. Fresh produce is somewhat recession-proof.”
NEIGHBORS COME TOGETHER
Adversity forces people to think out of the box and redefine their business models. Throughout the Coachella Valley, there are signs this is already happening. The Viceroy hotel in Palm Springs has partnered with Saks Fifth Avenue in Palm Desert to market both properties through a series of in-store and in-hotel events this season. Cities say they understand more about operating as a team to streamline procedures and accomplish tasks. Tourism agencies are looking to stimulate the drive and local markets. Valley economic agencies are stepping up efforts to create public-private partnerships to diversify the local economy. And while the faces of the valley’s nine cities are very different, the recession is forcing everyone to find common ground on which to grow.
CITIES LEARN HARD LESSONS
The 2008-2009 season redefined success. “Flat” was the new “up,” and anyone whose business didn’t drop more than 20 percent could rejoice.
As for Coachella Valley cities, they cut staff, services, and operating hours. While Indian Wells maintained a budget surplus, no one escaped feeling some twinge from the economy’s gyrations.
Average monthly hotel room occupancy plunged more than 50 percent — resulting in diminished transient occupancy tax revenues to city coffers. Fortunately, federal stimulus funds helped fund parks and infrastructure improvements.
A loss of convention business took its toll on Palm Springs. Much-touted mixed-use projects at both ends of downtown were abandoned; Desert Fashion Plaza refurbishing plans were scaled down, and a start date has yet to be set. On the plus side, the Escena residential development reopened after several dormant months; and two hotels — Hyatt Regency Suites and Wyndham Palm Springs — have undertaken extensive face lifts. The city coped with a multimillion-dollar budget shortfall by furloughing employees one day a week and making across-the-board cuts in services and operations.
Desert Hot Springs managed to get its $6.5 billion bond issue to rehabilitate 800 blighted homes passed before the state’s finances negatively impacted California’s credit rating. “We are actively using local vendors for this rehab program,” says City Manager Rick Daniels. “And we are requiring any vendor contracted by the city to use local unemployed labor.”
The demise of Buddy Greco’s Supper Club in Cathedral City was a blow to the city’s entertainment industry. However, soon after the closing, there was talk that an out-of-state developer looking for distressed restaurants could take over the property. The crisis in the nation’s auto industry meant a decline in sales tax from the Highway 111 Auto Center. To entice prospective car buyers, the city partnered with the Cathedral City New Vehicle Dealers Association in a sweepstakes (April 13-June 30) that awarded $5,000 twice a month to those who test drove a car. The city also developed a Web site — www.ccisvalue.com — to promote all local businesses.
While the valley’s average monthly hotel occupancy dropped 54 percent, Rancho Mirage enjoyed a 63 percent increase. However, transient occupancy taxes declined — testimony to the success of consumer-friendly package deals. Miami-based Gencom is seeking additional financing to complete The Ritz-Carlton, which was 80 percent complete when financing agent Lehmann Brothers imploded. Rancho Mirage will issue rebates on future hotel taxes to increase the property’s potential revenues, thus making it more attractive to lenders. “Lehmann Brothers failed, not the project,” says Rancho Mirage Economic Development Director Curt Watts. Nevertheless, instead of a multimillion-dollar projected surplus, the city now expects to break even for the year; and predictions for the 2010-2011 season are pragmatic: Rancho Mirage is looking for TOT and retails sales tax revenues to decline another 10 percent each.
“While a renewed focus on the drive market has realized some success, the modest upswing in leisure travel has not offset the loss of convention business,” says Palm Desert Mayor Bob Spiegel. “This year there have been more businesses lost than any other in the 14 years I’ve been on the city council.” The city predicts a revenue shortfall of $6.2 million and has so far cut $6.3 million in expenditures. Meanwhile, The Gardens on El Paseo is on target for expansion, due for completion in 2010.
La Quinta eliminated three contract employee positions in its building and safety department and two more in the public works department. “The drop in general fund revenues of $4.3 million in fiscal year 2008-2009 prompted the city to cut $4.5 million in expenditures, say Assistant City Manager Bret Plumlee. “Reductions were made in every department.”
“Our work culture is more similar to that of a private-sector business than a government agency,” says Indian Wells City Manager Greg Johnson. The city council cut $2.1 million from its operating budget. “We’re not just balancing the budget,” Johnson says. “We’re looking well into the future to ensure the future stability of Indian Wells.” Though the city anticipates a 25 percent reduction in income from sales tax, transient occupancy tax, and building permits, it anticipates a $2 million general fund surplus.
Indio is pursuing federal stimulus money in a big way. “We may have seen one of the worst economic downturns since the Great Depression,” says Mark Wasserman, assistant to the city manager, “but we are also experiencing one of the most opportune times to secure federal dollars to support our projects and put people to work.” The city has applied for federal funding for fleet energy-efficiency, to increase law enforcement services and personnel, and for community block grants and is courting hotel chains so that out-of-town visitors to events such as the Coachella Music and Arts and Stagecoach festivals and participants at the Empire Polo Club can find accommodations in Indio, closer to the events.
Coachella seeks to increase outside grant funding for capital improvement projects and is lobbying to attract business to its overlapping enterprise and empowerment zones. Coca-Cola is scheduled to open a regional distribution center this fall. The city, which has no hotels, has been contacting hotel operators.
No city went unscathed, but leaders say they learned the importance of teamwork and how to do more with less. The cities that suffer least are those that realize the importance of contingency plans and “rainy day funds,” because the sun doesn’t always shine — even in the California desert.